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Council of Logistics Engineering Professionals (CLEP)

Lunch & Learn22 February 2018

Logistics Ramifications from DoD Financial Compliance and Audit Readiness

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DoD Financial Audit - Scope

For more than 20 years, the Comptroller General of the United States has consistently identified the financial management of the Department of Defense as a high-risk area. The Department’s inability to track and account for billions of dollars in funding and tangible assets continues to undermine its management approach.

Source: National Defense Authorization Act for FY18

The DoD’s annual budget represents almost half of the Federal Government’s discretionary budget and it holds more than 70 percent of the Federal government’s assets - $24 Trillion Dollars!

In compliance with the September 30, 2017 deadline established by the National Defense Authorization Act for Fiscal Year 2010 (Public Law 111-84), the Department has certified that they are ready to undergo a full financial audit…

We have many challenges to address…

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Agenda – Objectives for the Brief:

• Discussion of notable logistics challenges and initiatives, in progress and planned, that are receiving additional scrutiny because of audit, and:

• Specific logistics issues that have been exacerbated by new, or refocused requirements driven by audit readiness

• Examples from a DoD perspective, but germane to ongoing logistics challenges that other Federal Agencies must still address/manage, even if audit has been accomplished (with a clean, unqualified audit opinion)

• This is not an audit primer

• Bottom Line Up Front (BLUF):

In the beginning: Chief Financial Officer (CFO) Act, and Office of Management and Budget (OMB) Circular A-123….

…I am going to make the case that audit has forced a paradigm change on the way we accomplish both accountability and accounting; highlight that accounting/audit requirements are now part of our operational imperative; highlight some of the logistics challenges, and underscore the imperative to understand and address the “why” in order to address; and cover enough material at a high level that should encourage questions and dialog…

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Paradigm shift…

• Significant changes in systems, processes, and resources are requiredLogistics issues that have been exacerbated by new, or refocused requirements…

Audit has set in motion a paradigm shift in the way both accounting and accountability must now be accomplished

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Logistics Equities…

DoD has 70% of the Federal Government’s assets - $24T!

• Inventory and Related Property (Note 8)• General Property, Plant and Equipment (Note 9)

• Includes accountability and accounting for things like:

Ships and subs… Ordnance Aircraft Engines Operating Materials and Supplies (OM&S)

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What do we have ‘on book’? (Navy Balance Sheet)

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What do we have ‘on book’?, continued

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Just a little bit about Audit…

• GAAP: Generally Accepted Accounting Principles

• SFFAS:Statement of Federal Financial Accounting Standards are GAAP developed/ revised specifically for Federal entities.

• FASAB:The Federal Accounting Standards Advisory Board – they develop Standards

Requires standard processes that are well-documented and auditable, systems that feed our financials, and solid controls and testing to maintain a sustainable

way ahead

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Many Challenges

Editorial –

• APSRs not being used

Disparate systems

• Contracts that don’t fully support audit requirements

• Expensing material upon receipt

• Lack of Standard Processes and Support

• Passive management of Excess/Obsolete Material

Why?...

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Operations and Sustainment - Procurement

Procuring and transacting in an approved APSR:

• There are many different ways we procure assets and material, some pose additional risk to financial compliance Lack of material visibility Insufficient accounting functionality Decentralized procurement- accountability

• What are some of the reasons approved APSRs are not consistently used?

• What contracting efforts can improve upon the challenge?

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Operations and Sustainment – Receipt and Inventory

Expense material (only) when it is consumed – Account for assets accordingly:

• Purchase method vs the Consumption method of accounting Improper accounting leads to accountability deficiencies – and

vice versa

• Both assets and material must be accounted for

• What are the conditions that dissuade from proper receipt accounting?

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Disposal

Why is disposal a challenge?

Holding Costs in DoD:

• Not applicable in many operations decision-making, why?

• What if the cost to dispose is higher than the cost to hold?

• How to ensure disposal is accomplished? Incentives Resources

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What are the Auditors going to check? E&C and Valuation

Existence and Completion (E&C): All assets/material recorded in the Accountable Property System of Record (APSR) exist (Existence), and all assets/material are recorded in their APSR (Completeness).

Valuation: The process of valuing assets/material for financial-reporting purposes. Several accounting-valuation methods are being used by DoD.

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Valuation Case: How do we value a ship?!

• Audit requires appropriate valuation of all assets

• Valuation from receipts, DD250s, accounting of actual procurement cost at the transaction level is difficult from our current systems and processes

• SFFAS Deemed Cost allows for ‘latest acquisition cost’, like-item value, historical cost, and/or other selected methods

• One Example: Valuing an Aircraft Carrier SCN costs Capitalization/Depreciation Modernization CIP Documentation

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Summary:

• Audit Readiness presents a significant paradigm shift in the way we do things both in accountability and accounting – particularly with regards to assets and materials in operational logistics

• We must address the systems, processes, and resources to accomplish logistics requirements, now, in a GAAP-compliant way

• Decision makers need to understand the ‘why’s’ to our challenges in order to effect change that works for all stakeholders

• We must modify day-to-day logistics activities to achieve and maintain audit readiness

• DoD will succeed, and will be even more ready – and financially sound - due to audit readiness!

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About the Speaker

Steven D. MacDonald is a retired Navy Supply Corps Officer, currently serving as President/CEO of DWBHCORP, Federal Contractor based in the DC-metropolitan area. He also serves as the Managing Member for three Joint Ventures supporting DoD and other Federal Agencies. Prior to establishing DWBHCORP in 2013, he served as Vice President, Corporate Development, then as Chief Operating Officer (COO) at Logistics Support, Inc for approximately seven years.

Mr. MacDonald is a Certified Professional Logistician (CPL) from SOLE - The International Society of Logistics, an active Project Management Professional (PMP®) and Member of the Project Management Institute (PMI). He was a Defense Acquisition DAWIA III and Member of the Acquisition Professional Community (APC). He held Navy Subspecialty Codes in Operations Research (OR), Inventory Management, Transportation Logistics, and as a Joint-Qualified Staff Officer (JSO). He is an enthusiastic proponent of advancing accountability initiatives that lead to audit readiness, and is actively supporting Navy FIAR (Financial Improvement and Audit Readiness).